Garrison 14e Practice Exam – Chapter 3
Print these pages. Answer each of the following questions, explaining your answers or showing your
work, and then compare your solutions to those provided at the end of the practice exam.
1. Reformer Company estimates that 64,000 direct labor hours will be worked and 80,000 machine
hours will be incurred during the year. In addition, the company has developed the following cost
estimates for next year:
Sales commissions
Direct labor
Salary of production supervisor
Rent on factory equipment
Direct materials
Advertising expense
Indirect materials
$600,000
440,000
280,000
128,000
120,000
88,000
40,000
If overhead is applied on the basis of direct labor hours, what is the company’s predetermined
overhead rate?
2. Sunstead Company uses a job-order costing system and applies manufacturing overhead to Work in
Process inventory using a predetermined overhead rate. The company had no beginning or ending
inventories in the current month. During the month, the company’s transactions included the
following:
Manufacturing overhead cost incurred
Manufacturing overhead cost applied
Direct labor cost incurred
Direct materials issued to production
Indirect materials issued to production
Part (a)
What was the cost of goods manufactured?
$1,000,000
904,000
856,000
720,000
64,000
Part (b)
What was the amount of cost of goods sold?
3. Northern Company uses a predetermined overhead rate based on direct labor hours to apply
manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing
overhead would be $400,000 and direct labor hours would be 40,000. The actual figures for the year
were $430,000 for manufacturing overhead and 42,000 direct labor hours. Is manufacturing
overhead underapplied or overapplied for the year? By how much?
4. Intercontinental Company bases its predetermined overhead rate on direct labor hours. At the
beginning of the current year, the company estimated that its manufacturing overhead would total
$440,000 during the year. During the year, the company incurred $400,000 in actual manufacturing
overhead costs. The Manufacturing Overhead account showed that overhead was underapplied by
$16,000 during the year. If the predetermined overhead rate was $40.00 per direct labor hour, how
many hours were worked during the year?
GNB 14e Practice Exam Solutions – Chapter 3
1. Solution (Learning Objective 1):
First, determine the estimated manufacturing overhead costs. Note that manufacturing overhead
costs include only indirect product costs. Direct materials and direct labor are product costs but are
direct (rather than indirect) costs. Sales commissions and advertising expenses are period (rather
than product) costs.
Indirect materials
Rent on factory equipment
Salary of production supervisor
Estimated manufacturing overhead costs
$ 40,000
128,000
280,000
$448,000
Then, determine the company’s predetermined overhead rate as follows.
Estimated manufacturing overhead costs
Estimated direct labor hours
Predetermined overhead rate
$ 448,000
 64,000
$7.00/DLH
2. Solution (Learning Objective 6):
Part (a) Determine the cost of goods manufactured for the month as follows.
Work in process, beginning of period
Direct materials issued to production
Direct labor cost incurred
Manufacturing overhead cost applied
Total manufacturing costs
Less: work in process, end of period
Cost of goods manufactured
$
0
720,000
856,000
904,000
2,480,000
(0)
$2,480,000
Part (b) First, determine whether overhead was underapplied or overapplied as follows.
Actual overhead costs
Overhead costs applied to production
Amount of underapplied overhead
$1,000,000
904,000
$ 96,000
Then, determine the cost of goods sold as follows.
Finished goods, beginning of period
Add: Cost of goods manufactured
Cost of goods available for sales
Less: finished goods, end of period
Unadjusted cost of goods sold
Add: Underapplied overhead
Adjusted cost of goods sold
$
0
2,480,000
2,480,000
0
2,480,000
96,000
$2,596,000
3. Solution (Learning Objectives 1, 2, and 7):
First, calculate the predetermined overhead rate (based on direct labor hours (DLH)) as follows.
Predetermined overhead rate = Estimated overhead costs  Estimated direct labor hours
Predetermined overhead rate = $400,000  40,000 direct labor hours = $10.00 per DLH
Then, determine the amount of manufacturing overhead applied during the period:
Overhead applied = Predetermined overhead rate x Actual direct labor hours
Overhead applied = $10.00/direct labor hour x 42,000 direct labor hours = $420,000
Finally, compare the actual manufacturing overhead costs to the amount applied and decide whether
it is underapplied or overapplied:
Actual
Applied
Balance (underapplied)
$430,000
420,000
$ 10,000
4. Solution (Learning Objectives 1, 2, and 7):
First, determine the amount of overhead applied to production by reference to the information about
the Manufacturing Overhead account.
Amount underapplied = Actual overhead – Amount applied to production
Amount underapplied = $400,000 – Amount applied to production = $16,000; Amount applied to
production = $384,000
Then, solve for the direct labor hours here (the activity base for the overhead rate).
Manufacturing overhead applied = Predetermined overhead rate x Direct labor hours = $384,000 =
$40.00 per direct labor hour x Actual direct labor hours; Actual direct labor hours = 9,600